Investors were cautiously optimistic heading into the third-quarter earnings report from BJ's Wholesale Club(NYSE:BJ). While the regional warehouse giant hadn't been posting growth as strong as rival Costco, its sales have been steadily rising in 2019 while profitability improves.

On Thursday, BJ's extended those positive trends into the second half of the year. However, its growth rate slowed enough that management decided it was prudent to lower their 2019 target.

More on that forecast in moment. But first let's take a look at BJ's latest operating trends.

A man shops for eggs.

Image source: Getty Images.

Weaker sales growth

Sales gains slowed as compared to the prior quarter, which wasn't what investors were expecting to see. After adjusting for fuel price swings, comparable-store sales rose 1.1% compared to 1.6% last quarter and 1.3% for the first half of 2019. For context, Costco has been boosting comps at a 6% rate in recent quarters. Walmart's latest gains have been hovering around 3% in the U.S. for the past year.

BJ's executives didn't provide a specific reason for the softening trends, but pricing might have played a role. The warehouse retailer has been trying to boost profitability in recent quarters by focusing on more high-margin categories and trimming its grocery offerings. That strategy helped lift gross profit margin this quarter and for the last nine months, but it may have come at the expense of shopper volume.

Strong finances

Management had more positive news to report on the financial side of the business. In addition to the uptick in gross profit margin, expense growth was contained so that operating profit margin increased. BJ's generated $101 million in operating profit, up from $91 million last year.

Cash flow was similarly strong, with operating cash rising to $145 million so far in 2019 compared to $63 million in the year-ago period. Executives highlighted these financial wins without commenting on the slower sales growth pace. "We delivered solid margin improvement," CEO Christopher Baldwin said in a press release, "and continued earnings growth in the third quarter."

Updated outlook

BJ's issued a new outlook for the fiscal year that was likely a disappointment for investors. The sales forecast was downgraded, with comps now on track to rise by roughly 1.4% in 2019 compared to the 2% figure executives had issued three months ago. The retailer is predicting a slightly lower tax rate now. However, slower sales growth and a tougher competitive market are having a negative impact on profits. To that end, BJ's lowered its guidance for adjusted earnings, net income, and earnings per share.

That forecast suggests the company is losing market share to peers both inside and outside of the warehouse retailing niche. Management is aiming to protect shareholders' returns in that tough environment by initiating a new stock repurchase plan that takes advantage of BJ's robust cash flow.

Investors chose to focus more on the chain's worsening competitive position, though, and shares fell by over 10% immediately following the report's release. The stock might remain under pressure until BJ's can show that it has the right strategy to match the expansion rate of industry peers.